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Fidelity Life gets $100 million injection

The NZ Superannuation Fund is looking to take a 41% cornerstone stake in Fidelity Life.

Tuesday, October 31st 2017, 4:58PM 19 Comments

The $36 billion New Zealand Superannuation Fund is proposing to take a minimum $100 million stake in Fidelity Life which would give it a 41.1% cornerstone stake in the company.

The transaction is subject to a number of conditions, some of which require action from shareholders.

Fidelity Life chairman Brian Blake, says securing the NZ Super Fund as a major shareholder will provide new capital which will enable the company to accelerate its growth strategy.

“Fidelity Life has experienced strong growth in recent years and this has outpaced our ability to fund the future rate of growth we’re aiming for without additional capital.”

“If our shareholders provide the necessary approval for the investment to proceed, the new capital will allow us to deliver on our future strategy providing strong, sustainable returns and growth over the long term,” Blake said.

Fidelity Life is privately held by more than 150 shareholders. The proposed investment is to be made up of $75 million of new shares issued to the NZ Super Fund at $115 per share; and the acquisition of a minimum of $25 million of existing shares. As part of the acquisition of existing shares, eligible minority shareholders (including all New Zealand resident shareholders) will have the opportunity to sell some or all of their shares to the NZ Super Fund for $130 per share. This offer does not extend to the Company's majority shareholders.

The NZ Super Fund will acquire shares from the Fidelity Family Trust at $115 per share.

“The NZ Super Fund is a great fit with Fidelity Life. We were both founded by Kiwis for Kiwis and are focussed on protecting the future for New Zealanders. The proposed investment represents a strong vote of confidence in Fidelity Life by New Zealand’s pre-eminent investor,” Blake said.

NZ Super Fund Chief Investment Officer Matt Whineray said: “This is a rare opportunity for the Fund to take a significant direct stake in a New Zealand life insurance company. The additional capital we are providing will support Fidelity’s long-term growth plans.”

Independent advisers Simmons Corporate Finance have concluded that the value of the Fidelity Life shares involved in the proposed transaction is in the range of $110-$130 per share and that the total value of the company is between $198 million and $220 million. 

“This is an exciting future step for Fidelity Life. We have come a long way since we were founded in 1973. We have more than 100,000 customers and our products are distributed via a network of 2,700 independent financial advisers and through strategic alliances. This new capital will enable us to build digital capability to support innovation, productivity and improved support for customers, advisers and our partners,” Fidelity Life chief executive Nadine Tereora said.

Fidelity Life’s Board is recommending shareholders support the investment. Shareholders, including the Fidelity Family Trust, will vote on changes to Fidelity Life’s constitution needed for the proposal to proceed at the company’s Annual Meeting on 12 December. If the constitution is altered and other conditions are met settlement will occur after then.

Shareholders can expect to receive their voting papers with the Notice of Meeting on 9 November.
 

Tags: Fidelity Life investment Nadine Tereora NZ Super Fund

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Comments from our readers

On 31 October 2017 at 5:16 pm RanDerson said:
Curious investment. I wonder what the $75 million will be applied to? Perhaps unlocking themselves out heavy reinsurance?
On 31 October 2017 at 8:47 pm Barry Read said:
Next announcement Fidelity buy Asteron?
On 31 October 2017 at 11:12 pm Murray Weatherston said:
In the interests of accuracy, I'm afraid the headline is wrong. Fidelity got an injection of only $75 million; the other $25 million was a payment to existing shareholders who sold down
On 1 November 2017 at 10:33 am Tash said:
Fidelity buy Asteron Barry? More likely AIA will buy Asteron. Is AIG not eyeing Suncorp?
On 1 November 2017 at 10:47 am Murray Weatherston said:
PS Lest anyone is confused by my earlier comment yesterday, I am certainly not belittling Fidelity's achievement in raising new capital. Indeed, I congratulate them on their success.

This development, (taken together with Partners Life's earlier capital raising and AIA's purchase of Sovereign) seem to put permanent lie to one of the principal assumptions of the MJW authors in their infamous report.

When we met with them, it was clear to us that one of MJW's big worries was that the solvency of the insurance companies was at risk. At least implicit (and maybe even explicit) in what they told us was that the profit share of life company revenue NPV was too small because the commission share of revenue was too great (hence their "cut commissions" theme) and therefore the NZ insurers were not an attractive investment target.

As Ms Tui would say "Yeah right".
On 2 November 2017 at 7:48 am Brent Sheather said:
Maybe someone can give readers some insight as to what levels of commission are typically payable by Fidelity to its agents on a range of products? Also it would be interesting to see what multiple of net profit after tax and multiple of book value the Super Fund is paying for Fidelity Life given they value it at around $200 million?
On 2 November 2017 at 8:47 am Brent Sheather said:
Hi Murray
Just saw your last paragraph and my thought is that if the commission share of revenue is high then that simply lowers the NPV suggesting a lower price than would otherwise we the case. In fact you could turn the MJW argument around, if indeed that was their argument, that high rates of commission are a good thing because it lowers the NPV, lowers the price you pay then you can, theoretically anyway, reduce commissions or go to robo delivery and you generate higher profits.

Regards
Brent
On 2 November 2017 at 1:18 pm dcwhyte said:
@Tash - I suspect AIA's acquisition of Cominsure and Sovereign will be enough to keep them occupied for the foreseeable future. AIG (no longer associated with AIA) is indeed looking at Suncorp's life company in OZ that may extend to Asteron in NZ.
On 2 November 2017 at 1:43 pm Murray Weatherston said:
Hi Brent
1. I don't know what Fidelity's commission rates are. Not sure they are relevant in the same way as I don't think it is relevant to know what commission bonus rates Toyota pays its new car department staff!

2. To be pedantic, I should have said revenue PV only (not NPV).

3. The value of the company is including the new capital injection of $75 million I would have thought.

4. Since Fidelity is a 100% owned NZ company, it is not required to publish its accounts as far as i know.

5. My knowledge of NZFRS rules for financial statements of insurance companies is only cursory. But what I do know tells me it is a black art incomprehensible to ordinary mortals.

6. I can't imagine the Big Cullen Fund would be a generous purchaser in any event - they will have "Buy low" engraved on their hearts.
On 2 November 2017 at 3:37 pm RanDerson said:
@Murray
Fidelity does publish its accounts, net profit down 80% to $5.2 million. Published just yesterday in fact on Companies Office.
On 2 November 2017 at 3:41 pm comment1 said:
FYI While a private company they are still a registered company and have to file accounts with the Companies Office (CO). If you want to see financials you just have to look under the company name on the CO website
On 3 November 2017 at 8:01 am Brent Sheather said:
Hi Murray

I think commission rates are hugely relevant…. firstly as a contrary indicator of value and secondly as a cross check on the attractiveness or otherwise of a product...particular those sold in the financial services area. At the risk of stating the obvious they are a contrary indicator of value because, all things being equal, the more commission that is paid to an agent the less of your money goes to actually buying the product. Therefore we can conclude, again all things being equal, that the less you pay for a product the less you receive. Obviously this doesn’t work all the time but as a general rule it is difficult to criticise. Commission costs are essentially distribution costs and Amazon is a good example of the value that can be delivered to consumers by a strategy of minimising distribution costs. Is it possible that Fidelity’s model, with huge commission costs, will potentially be displaced by technology and lose market share because it’s products will eventually be more expensive?

As regards “a cross check on attractiveness” this strategy has worked well for us in the past and is one of the reasons we avoided Feltex, finance company debentures etc etc. Here is another example...a while back BNZ sold some plain vanilla bonds...little or no commissions...a month later some deeply subordinated junk debt...about 1.5 percent commission paid. My simplistic view held on behalf of clients is : the higher the commission the less attractive the product is likely to be.

Now for some numbers for Fidelity: In 2017 net premium revenue was $124m and from this commissions of $69m were paid. Is that is an expensive distribution channel? Net profit after tax was $5.9m and the company is valued at $200m
On 3 November 2017 at 9:06 am Steven Popodopolus said:
Your figures seem to be wrong Brent. Commissions are 20% of cost of Premium overall for Fidelity.

You supply another one off analogy as "proof" when it isn't. It is a one off analogy.

In the MJW report, they had included suppliers who PAID NO COMMISSION to advisors. The cost of premium was no different, and in some cases more, than products supplied by commission based advisors.
On 3 November 2017 at 3:44 pm Brent Sheather said:
Hi Steven

If you look at page 2 of the Fidelity Life financial statements for the year ended 30 June 2017 insurance premium revenue is $234m and from that $110m is payable to reinsurers leaving net premium revenue of $124m. Commission expenses are $68.9m. Commission is therefore 55.6% of net premium revenue.

Regards
Brent
On 5 November 2017 at 5:56 pm dcwhyte said:
The figures quoted previously are new business plus renewal premiums and new business plus renewal commission. When separated and compared, they are interesting but really are no metric by which products should be judged. There is no evidential correlation between commission levels and product quality, as far as I can see. Younger companies with fewer legacy expenses and tighter expense control can allocate more to commissions and still maintain high-quality products. Sovereign and Partners have both done this in their early years. In Partners Life case, they have generous commission structures with products also rating at or near the top for quality by the industry analysts. Selecting or recommending products by commission content is not reliable. Bank manufactured risk products theoretically do not have a commission element, but their products are no less expensive nor do they have more benefits than specialist life company products. Indeed, many analysts will point to some bank products being inferior.

Even with the reducing number of providers, there are so many different definitions, wordings, benefit structures, claims experience, claims management (to name but a few), that assessing product merit by acquisition cost alone may well be doing the client a disservice.
On 6 November 2017 at 8:34 am Brent Sheather said:
Hi David

I take your point. Although you say you can’t see a correlation between insurance commission levels and product quality common sense suggests that that should be the case. You also say bank risk products don’t have a commission element but I think that is incorrect. Companies like Fidelity pay commission as it provides a distribution channel and because banks have their own distribution channels this cost is equivalent to commission. Also I thought banks paid bonuses to staff for volume so again this is commission.

My initial thought was that because Fidelity pay so much in commission that the new money from the Super Fund might be directed toward some initiative to get those costs down and thus improve profitability. It will be interesting to see where Fidelity go now that the Super Fund owns 41%.

Regards
Brent
On 6 November 2017 at 3:32 pm dcwhyte said:
I agree it's not intuitive, but the analysts can point you toward many products with high commission levels that rate highly in any objective evaluation. Likewise, companies with products that allocate acquisition expenses to non-intermediated channels - and by inference are less expensive - serve a different segment of the market that does not require high-quality product features. Rather than look at the cost alone, I believe advisers should look at what value for money is being provided.
Commissions generated are, for most advisers, the same as fees to financial planners, i.e. revenue for their trading entities from which costs have to be deducted and not direct income to the adviser personally.
Bank staff who are paid salaries wouldn't know how much 'commission' is generated by a product sale if any and I doubt whether disclosure of this will be required going forward.
On 13 November 2017 at 7:56 am Brent Sheather said:
Did anyone read the 1 November interview with the Chief Exec of Fidelity Life? She says “it will use the money from NZ Super to expand its digital capabilities”. She went on to say “growing its digital capability would offer customers different ways of interacting with it whether that meant buying life insurance at 1 am or after dinner or just finding out more of their policy details”.

With commission levels so high and such a big component of costs it was pretty obvious that the Super Fund would be encouraging Fidelity to establish a new, lower cost, distribution channel. I’m sure Fidelity will still support advisors but the writing is on the wall.
On 13 November 2017 at 10:14 am dcwhyte said:
Or is it possible that the CEO presented a strategic paper to the Board that outlined a plan for using long term digital disruption to support and enhance the intermediary channel?

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